Deck 28: Investor Protection and Corporate Governance

Question 1

Most securities cannot be resold without registration.

Answer 1

False

Question 2

Online crowdfunding can be exempt from the registration requirements.

Answer 2

True

Question 3

When a security is exempt from the registration requirements,its offering is also exempt from the provisions of the Securities Act of 1933.

Answer 3

False

Question 4

The sale and transfer of securities are heavily regulated by federal and state statutes and by government agencies.

Question 5

Most private,small-business,noninvestment company offers of securities are exempt from the registration requirements.

Question 6

Anyone who wrongfully obtains inside information and trades on it for his or her personal gain can be liable under SEC Rule 10b-5.

Question 7

Small-business issues can use an integrated registration and reporting system that requires simpler forms than the full registration system.

Question 8

Misrepresenting or omitting facts from a registration statement or prospectus is known as puffery and does not violate the Securities Act of 1933.

Question 9

The Securities and Exchange Commission does not regulate the content of proxy statements.

Question 10

Insider trading occurs when persons buy or sell securities on the basis of information that is not available to the pubic.

Question 11

The Securities Exchange Act of 1934 provides for continuous periodic disclosures by certain publicly held companies.

Question 12

Securities can be sold before the effective date of the registration statement without restrictions.

Question 13

While the Securities and Exchange Commission reviews a registration statement for completeness,most issuers can distribute a free-writing prospectus.

Question 14

Scienter is not required to impose criminal sanctions under Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

Question 15

While the Securities and Exchange Commission reviews a registration statement for completeness,the securities can be offered for sale but not sold.

Question 16

Forward-looking forecasts that turn out to be wrong can be protected against liability for securities fraud if they include "meaningful cautionary statements."​

Question 17

A well-known seasoned investor has less flexibility in filing registration statements and using free-writing prospectuses than other issuers.

Question 18

Most private,midsize-business,noninvestment company offers of securities are exempt from the registration requirements.

Question 19

The definition of security in the Securities Act of 1933 includes interests that involve the right to buy a security on a national security exchange.

Question 20

The Securities and Exchange Commission has implemented no new regulations since the Securities Exchange Act.

Question 21

Trend Clothing Corporation is a public company whose securities are traded among investors.Under the Securities Act of 1933,a security is​

A)almost any stake in the ownership or debt of a company.
B)an investment that is guaranteed to make a profit.
C)only such common forms of debt and equity as bonds and stocks.
D)whatever a company represents to the public as a security.

Question 22

Trail Bike Corporation is a public company whose shares are traded in the public securities markets.Under the Securities Act of 1933,Trail Bike is required to​

A)contribute to the operations of national stock exchanges.
B)disclose financial and other information about its securities.
C)engage in market surveillance to deter undesirable practices.
D)all of the choices.

Question 23

A Ponzi scheme is a fraudulent investment that pays returns from new capital invested with the fraudsters instead of from a legitimate investment.

Question 24

Paddle & Portage Tours Corporation is poised to issue securities that,under the Securities Act of 1933,are "exempt." This means that the securities can be sold​

A)on the basis of a material omission or misrepresentation.
B)on the basis of nonpublic information.
C)within any six-month period by certain insiders.
D)without being registered.

Question 25

Every state has its own corporate securities laws that regulate the offer and sale of securities within tis borders.

Question 26

State securities laws apply mainly to intrastate transactions.

Question 27

Corporate "outsiders" may be held liable for insider trading under Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

Question 28

Issuers of securities offerings must comply with either federal or state securities laws,but not both.

Question 29

The Sarbanes-Oxley Act of 202 attempts to increase corporate accountability by imposing strict disclosure requirements and harsh penalties for securities laws.

Question 30

Securities must be registered under the Securities Act of 1933 for the Securities Exchange Act of 1934 to apply.

Question 31

Fact Pattern 28-1
College Bound,Inc. ,markets test and study prep materials and courses.College Bound wants to make an initial public offering of securities.The firm believes that it qualifies for an exemption under Regulation A from the full registration requirement of the Securities Act of 1933.
Refer to Fact Pattern 28-1.College Bound decides to sell its new securities via the Internet.Most likely,this offering​

A)will avoid high expenses.
B)is an investment scam.
C)is a Ponzi scheme.
D)constitutes insider trading.

Question 32

Media Marketing Corporation is required to file a registration statement with the Securities and Exchange Commission.This statement must contain​

A)a copy of prospectuses to be provided to investors.
B)a description of securities being offered for sale.
C)a record of pre-registration sales in securities.
D)all of the choices.

Question 33

An insider must actually use inside information in connection with the purchase and sale of securities to violate Section 16(b)of the Securities Exchange Act of 1934.

Question 34

The key to liability under Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5 is whether information omitted or misrepresented in connection with the purchase or sale of a security is material.

Question 35

For a defendant to be convicted in a criminal prosecution under the securities laws,there can be no reasonable doubt that the defendant knew he or she was acting wrongfully.

Question 36

Under the Sarbanes-Oxley Act of 202,chief financial officers must certify the accuracy of information in corporate financial statements.

Question 37

Only the Securities and Exchange Commission can sue violators of Section 10(b)and Rule 10b-5.

Question 38

State corporation statues set up the legal framework for corporate governance.

Question 39

Under the Sarbanes-Oxley Act of 202,all members of a publicly traded corporation's audit committee must be outside directors.

Question 40

The Securities Exchange Act of 1934 applies to all cases involving the trading of securities,except in private transactions.

Question 41

Brian,the chief executive officer of Chairs & Tables,Inc. ,intentionally understates the amount of the firm's debts in information provided to investors as part of an issue of stock.Darla buys the stock and suffers a loss.Brian may be subject to​

A)government prosecution and a private investor's suit.
B)negative publicity but no criminal prosecution or civil suit.
C)only government prosecution.
D)only the private investor's suit.

Question 42

Fresh Fruit Company has assets of less than $10 million and fewer than fifty shareholders.Gourmand Pastries,Inc. ,has assets of more than $50 million and more than five hundred shareholders.The Securities Exchange Act of 1934 applies to​

A)Fresh Fruit and Gourmand Pastries.
B)Fresh Fruit only.
C)Gourmand Pastries only.
D)neither Fresh Fruit nor Gourmand Pastries.

Question 43

Fact Pattern 28-2
Ben,an accountant for AirLift,Inc. ,a ride service,learns of undisclosed company plans to distribute a new app.Ben buys 10,000 shares of AirLift stock.He reveals the company plans to Carly,who buys 5,000 shares.Carly tells Don,who tells Erwin,and each buys 1,000 shares.They know that Carly got her information from Ben.When AirLift publicly announces its new app,Ben,Carly,Don,and Erwin sell their stock for a profit.
Refer to Fact Pattern 28-2.Under the Securities Exchange Act of 1934,Carly is most likely​

A)liable for insider trading.
B)not liable because Carly did not prevent others from profiting.
C)not liable because Carly did not solicit information from Ben.
D)not liable because Carly does not work for AirLift.

Question 44

Fact Pattern 28-3
Dan,an accountant for Eureka! Inc.learns of undisclosed company plans to market a new laptop.Dan buys 1,000 shares of the firm's stock.He reveals the company plans to Fay,who tells Greg.Both Fay and Greg buy 100 shares.Greg knows that Fay got her information from Dan.When Eureka! publicly announces its new laptop,Dan,Fay,and Greg sell their stock for a profit.
Refer to Fact Pattern 28-3.Under the Securities Exchange Act of 1934,Fay is most likely​

A)liable for insider trading.
B)not liable because Fay did not prevent others from profiting.
C)not liable because Fay did not misappropriate any information.
D)not liable because Fay does not work for Eureka!

Question 45

Flo,a salesperson for Gear Oil Corporation,learns that the firm will increase the dividend it pays to shareholders.She buys 10,000 shares of company stock.When the dividend is announced to the public and the price of the stock increases,she sells his shares for a profit.She would not be liable for insider trading if the information about the dividend was​

A)material when she sold the stock.
B)available to the public after she bought the stock.
C)available to the public before she bought the stock.
D)forward-looking when she bought the stock.

Question 46

Fact Pattern 28-1
College Bound,Inc. ,markets test and study prep materials and courses.College Bound wants to make an initial public offering of securities.The firm believes that it qualifies for an exemption under Regulation A from the full registration requirement of the Securities Act of 1933.
Refer to Fact Pattern 28-1.If College Bound is exempt from the federal registration requirement,the firm is​

A)automatically exempt from any state registration requirement.
B)not subject to any state securities laws.
C)not necessarily exempt under a state registration requirement.
D)automatically subject to all state registration requirements.

Question 47

Guitar Factory Corporation files a registration statement and delivers a prospectus to the appropriate parties.These items are intended to enable the evaluation of certain financial risks by​

A)market professionals to explain to all investors.
B)government regulators to disclose to the general public.
C)sophisticated investors only.
D)unsophisticated investors.

Question 48

Space Trips Inc.files a registration statement with the SEC before making an offering to the general public.The registration contains false,immaterial statements of which the investors are unaware.The firm is charged with violating the Securities Act of 1933.Its best defense is​

A)the investors were not aware of the misrepresentations.
B)the issuer reasonably believed the misstatements were true.
C)the offering was made available to the general public.
D)the untrue statements were not material.

Question 49

To raise $120 million to expand operations,Primo Content Inc.makes a stock offering directly to sixty accredited investors and twenty sophisticated,but unaccredited investors.The firm plans to notify the SEC of sales.Under the Securities Act of 1933,this issue may qualify as an "exempt" transaction​

A)as is.
B)if all of the investors are also given material information about the firm,including its most recent financial statements.
C)if the offering is also made to the general public.
D)under no circumstances.

Question 50

Food Service Corporation,and its officers,directors,and shareholders,buy and sell securities.Section 10(b)of the Securities Exchange Act of 1934 applies to the purchase or sale of a security​

A)only by an investment company.
B)only involving short-swing profits.
C)only involving a tipper and tippee.
D)in almost any circumstances.

Question 51

Karin,an officer for LNG Corporation,buys 10,000 shares of its stock.One week later,LNG announces that it will merge with a competitor,Mining & Piping Company,and the price of LNG stock increases.One month later,Karin sells her shares for a profit.Under Section 16(b)of the Securities Exchange Act of 1934,Karin would not be liable if,after buying the stock,she had waited​

A)less than fourteen days to sell it.
B)more than six months to sell it.
C)ninety days to sell it.
D)two months to sell it.

Question 52

As part of a stock offering for Design Studio Corporation,the firm's accountant Eve intentionally misrepresents material facts in the prospectus.Fred buys the stock unaware of the misrepresentation and suffers a loss.Eve may be subject to​

A)none of the choices.
B)job termination but no other sanctions,penalties,or liability.
C)a fine,imprisonment,and damages.
D)professional censure but no criminal sanctions or civil liability.

Question 53

Fact Pattern 28-2
Ben,an accountant for AirLift,Inc. ,a ride service,learns of undisclosed company plans to distribute a new app.Ben buys 10,000 shares of AirLift stock.He reveals the company plans to Carly,who buys 5,000 shares.Carly tells Don,who tells Erwin,and each buys 1,000 shares.They know that Carly got her information from Ben.When AirLift publicly announces its new app,Ben,Carly,Don,and Erwin sell their stock for a profit.
Refer to Fact Pattern 28-2.If Ben is liable under the Securities Exchange Act of 1934,it will be because the information on which he based his purchase of AirLift stock was​

A)a forward-looking forecast.
B)not material.
C)not yet public.
D)not yet true.

Question 54

Bonds & Stocks Corporation,and its officers,directors,and shareholders,buy and sell securities.SEC Rule 10b-5 applies to the purchase or sale of​

A)a security by a financial corporation only.
B)a security involving a corporate insider only.
C)a security involving short-swing profits only.
D)any security.

Question 55

Shoes & Sox Corporation is a public company whose shares are traded in the public securities markets.With respect to financial and other significant information concerning its securities,the Securities Act of 1933​

A)imposes increased responsibility on chief corporate executives.
B)prevents insiders from trading among themselves.
C)requires disclosure.
D)creates a "safe harbor" for companies to make forward-looking statements.

Question 56

Beachware,Inc. ,wants to issue stock of $4 million in a single offering.The corporation must provide disclosure documents that generally are the same as those used in registered offerings to​

A)all investors and the Securities and Exchange Commission.
B)the Securities and Exchange Commission.
C)any accredited investors.
D)any unaccredited investors.

Question 57

Household Products Corporation wants to make an offering of securities to the public.The offering is not exempt from registration under the Securities Act of 1933.Before the firm sells its securities,it must provide investors with​

A)a forward-looking financial forecast.
B)an investment contract.
C)a prospectus.
D)samples of its products.

Question 58

Orbital Flights,Inc. ,is required to register its securities under Section 12 of the Securities Exchange Act of 1934.Section 16(b)of the act covers​

A)the declaration of dividends by Orbital's board of directors.
B)the later re-registration of Orbital's securities.
C)the short-swing activities of Orbital's insiders.
D)the solicitation of proxies from Orbital's shareholders.

Question 59

Global Trade Corporation is a public company that is poised to issue securities that do not qualify for an exemption from registration.This means that Global Trade must​

A)file a registration statement with the SEC.
B)issue the securities through an online registration site.
C)refrain from issuing the securities to unregistered investors.
D)register the securities with a national stock exchange.

Question 60

Fleet Delivery Corporation is a public company with a market capitalization of less than $75 million.Fleet is poised to issue securities in a transaction that,under the Securities Act of 1933,is "exempt." This enables Fleet to​

A)reduce the compliance costs by not requiring an auditor report.
B)buy and sell the securities without liability for "recaptures."
C)make forward-looking financial forecasts without liability.
D)withhold inside information from accredited investors.

Question 61

Ridley is an officer of Sun Watts,Inc.Ridley knows that a Sun Watts engineer recently developed a new,inexpensive method for collecting,storing,and converting solar power into fuel.Ridley takes advantage of this information to buy Sun Watts stock from Taylor and,after the discovery is announced,to sell the stock to Ulrich at a profit.Taylor claims that this is a violation of federal law.Is Taylor correct? If so,what federal law has Ridley violated,and what are its possible penalties?​

Question 62

Bernie is the chief executive officer of Cooking Network,Inc. ,which is required to file certain financial reports with the Securities and Exchange Commission (SEC).Under the Sarbanes-Oxley Act of 202,Bernie must​

A)certify that the reports are complete and accurate.
B)designate a corporate official to assume liability for inaccuracies.
C)do nothing.
D)read the reports and be prepared to answer questions about them.

Question 63

Spectrum Paints Inc.is a public company whose shares are traded in the public securities markets.Under the Sarbanes-Oxley Act of 202,the firm is subject to the direct corporate governance requirements of​

A)any other public company with which the firm exchanges shares.
B)any state in which the firm does business.
C)the federal government.
D)the state in which the firm incorporated.

Question 64

OnSpec,Inc. ,and its officers,directors,and shareholders,buy and sell securities.Section 16(b)of the Securities Exchange Act of 1934 covers purchases and sales of securities involving​

A)corporate insiders.
B)misappropriation.
C)short-swing profits.
D)tippers and tippees.

Question 65

Medico Corporation is a public company whose shares are traded in public securities markets.Medico's officers want to set up and maintain a system of "good corporate governance." What is "corporate governance"? What is its practical significance? What,at a minimum,should a "good" system of corporate governance include?​

Question 66

HVAC Heating & Air Conditioning,Inc. ,is a public company whose shares are traded in the public securities markets.Under the Sarbanes-Oxley Act of 202,to ensure that HVAC's financial results are accurate and timely,the firm's senior officers must set up and maintain​

A)internal "disclosure controls and procedures."
B)external "release and reveal timetables."
C)personal "peruse and review liability policies."
D)public "information and discussion forums."

Question 67

Boats & Ships Corporation is a public company,which Colorado regulates and in which Dennis invests.The Sarbanes-Oxley Act of 202 introduced direct federal corporate governance requirements to​

A)public companies.
B)private investors.
C)state regulators.
D)the Securities and Exchange Commission.

Question 68

Grain Mills Corporation is required to register its securities under Section 12 of the Securities Exchange Act of 1934.Section 14(a)of the act regulates​

A)the declaration of dividends by the firm's board of directors.
B)the later re-registration of the firm's securities.
C)the short-swing activities of the firm's insiders.
D)the solicitation of proxies from the firm's shareholders.

Question 69

Rico does not work for Street Bikes Company,but wrongfully obtains inside information concerning the firm.Based on the information,Rico buys and sells Street Bikes stock for personal gain.The Securities and Exchange Commission prosecutes Rico,arguing that he is liable because he stole information rightfully belonging to another.This argument is​

A)the blue-sky theory.
B)the misappropriation theory.
C)the free-writing prospectus theory.
D)the tipper/tippee theory.

Question 70

Fact Pattern 28-3
Dan,an accountant for Eureka! Inc.learns of undisclosed company plans to market a new laptop.Dan buys 1,000 shares of the firm's stock.He reveals the company plans to Fay,who tells Greg.Both Fay and Greg buy 100 shares.Greg knows that Fay got her information from Dan.When Eureka! publicly announces its new laptop,Dan,Fay,and Greg sell their stock for a profit.
Refer to Fact Pattern 28-3.Under the Securities Exchange Act of 1934,Geoff is most likely​

A)liable for insider trading.
B)not liable because Geoff is only a tippee,not a tipper.
C)not liable because Geoff is too far down the chain of disclosure.
D)not liable because Geoff traded on the basis of a material fact.

Question 71

Cattle Ranch Company offers its stock for sale only in a single state.The law in the company's state is like the law in most states.Thus,the firm's offer is subject to state securities statutes that include​

A)antifraud and disclosure provisions.
B)antifraud provisions only.
C)disclosure provisions only.
D)neither antifraud nor disclosure provisions.

Question 72

Leo is the chief financial officer of Moneysworth Corporation,which is required to file certain financial statements with the Securities and Exchange Commission (SEC).Under the Sarbanes-Oxley Act of 202,Leo must personally​

A)certify that the statements are accurate.
B)delegate the responsibility for preparing the statements.
C)deliver the statements to the appropriate SEC officer.
D)prepare the statements.